In re Seven Three Distilling Co.

• Decision Date: 04 August 2021
• Docket Number: 21-10219
• Parties: IN RE: SEVEN THREE DISTILLING COMPANY, L.L.C., PUTATIVE DEBTOR.
• Court: U.S. Bankruptcy Court — Eastern District of Louisiana

IN RE: SEVEN THREE DISTILLING COMPANY, L.L.C., PUTATIVE DEBTOR.

No. 21-10219

United States Bankruptcy Court, E.D. Louisiana

August 4, 2021

CHAPTER 11

SECTION A

MEMORANDUM OPINION AND ORDER

MEREDITH S. GRABILL UNITED STATES BANKRUPTCY JUDGE

This Court conducted a three-day evidentiary hearing on July 9 13, and 21, 2021, (the "Hearing") to resolve the Motion of Seven Three Distilling Company, LLC for (I) Dismissal of the Involuntary Petition for Failure To State a Claim for Relief; (II) or, Alternatively, Dismissal or Abstention Under § 305; and (III) Other Relief (the "Motion To Dismiss"), [ECF Doc. 6] and the Motion by Seven Three Distilling Co. LLC for Bond Pursuant to Section 303(e) of the Bankruptcy Code (the "Bond Motion"), [ECF Doc. 7], both filed by the putative debtor, Seven Three Distilling Company L.L.C. ("Seven Three"). An opposition to the Bond Motion was filed by the petitioning creditors: (i) 301 North Claiborne, LLC; (ii) Debra Levis, as Executrix for the Succession of Robert Levis; (iii) Cher Levis Hunt; (iv) Patrick Dubendorfer; and (v) M. Theresa Turla (collectively, the "Petitioning Creditors"). [ECF Doc. 17]. Seven Three filed a reply brief in support of its Bond Motion, [ECF Doc. 24]. The list of witnesses who testified and documents admitted as evidence is listed in this Court's Order dated July 22, 2021. [ECF Doc. 131]. Pursuant to that Order, the parties submitted post-trial briefs. [ECF Docs. 136 & 137]. The Court took the matter under submission.

Having now considered the evidence, the arguments of counsel, and the applicable law, this Court finds that the Motion To Dismiss should be denied and an Order of Relief should be entered on the involuntary chapter 11 bankruptcy petition (the "Petition") filed by the Petitioning Creditors. Moreover, the Court declines to abstain from adjudicating this dispute. Finally, the Court denies the Bond Motion as moot. The Court now makes the following findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure, made applicable to these proceedings by Rules 7052 and 9014 of the Federal Rules of Bankruptcy Procedure.^[1]

PROCEDURAL BACKGROUND

On February 22, 2021, the Petitioning Creditors filed an involuntary chapter 11 bankruptcy petition against Seven Three, alleging on Official Form 205 that "[t]he debtor is generally not paying its debts as they become due, unless they are the subject of a bona fide dispute as to liability or amount." [ECF Doc. 1]. On March 15, 2021, Seven Three filed the Motion To Dismiss and the Bond Motion.^[2] The Motion To Dismiss asserted two arguments: (i) the Petitioning Creditors cannot meet the standing requirements of 11 U.S.C. § 303(b), which requires that the Petition have been filed by three or more entities, each of which is either a holder of a claim against a putative debtor that is not contingent as to liability or amount and whose claims aggregate to more than $16, 750; and (ii) this Court should abstain under 11 U.S.C. § 305 as this is essentially an two-party dispute for the control of Seven Three and dismissal is in the best interests of the debtor and its creditors. Seven Three further requested damages under § 303(i), asserting that the Petitioning Creditors filed the Petition in bad faith as a litigation tactic.

The parties engaged in extensive discovery. On May 5, 2021, to potentially obviate the need for a trial or at least reduce the issues for trial, the parties filed cross motions for summary judgment. [ECF Docs. 41 & 42]. After considering the submissions by the parties, including memoranda in support, statements of uncontested facts, sworn declarations, and evidence submitted in support of each moving party's summary judgment motion, this Court granted in part and denied in part each party's motion. [ECF Doc. 113]. The Court found that three of the five Petitioning Creditors-301 North Claiborne LLC, Debra Levis, and Cher Levis-held undisputed claims and that those Petitioning Creditors had standing under § 303(b)(1) of the Bankruptcy Code to fil an involuntary petition. The Court also found Seven Three to be entitled to partial summary judgment on the claims held by the remaining two Petitioning Creditors, Patrick Dubendorfer and M. Theresa Turla, as those claims are the subject of bona fide disputes as to liability; therefore, those Petitioning Creditors are not eligible petitioning creditors under § 303(b)(1). The Court found that, although the parties presented argument on whether Seven Three was generally not paying its undisputed debts as those debts became due, see 11 U.S.C. § 303(h), the parties did not offer sufficient summary judgment evidence on that issue and thus deferred its ruling on that issue until after evidence was presented at the Hearing.^[3]

Prior to the Hearing, the Petitioning Creditors filed a Motion in Limine To Exclude Evidence Regarding Motivation for Filing Case and Incorporated Memorandum (the "Motion in Limine"), [ECF Doc. 91], asserting that "[t]he motivation or good faith of the petitioning creditors is not relevant unless the case has been dismissed for failure to comply with the statutory requirements of 11 U.S.C. § 303(b) and (h)." Thus, the Petitioning Creditors argued that presenting evidence at the Hearing on their alleged bad faith in filing the Petition would be premature. In its opposition to that motion, Seven Three asserted that the issue of Petitioning Creditors' alleged bad faith was relevant to the Court's consideration of abstention under § 305, but also argued that presenting such evidence at the Hearing is relevant and necessary because "bad faith [provides] independent grounds to dismiss an involuntary petition even if other requirements under § 303 are met." [ECF Doc. 103, ¶ 9]. The Court denied the Motion in Limine and allowed Seven Three to present evidence of the Petitioning Creditors' bad faith in filing the Petition, without ruling on Seven Three's assertion that a good-faith filing requirement applies to involuntary bankruptcy petitions. [ECF Doc. 105].

Thus, the issues before the Court at the Hearing included:

(i) whether Seven Three is generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute as to liability or amount pursuant to § 303(h);

(ii) whether, if permitted in this Circuit, the Court should dismiss this involuntary bankruptcy case-even if § 303's statutory requirements have been met-based upon an independent finding of bad faith on the part of the Petitioning Creditors;

(iii) whether, if the Court dismisses this involuntary bankruptcy case for a failure to satisfy the statutory requirements for filing the Petition under § 303(b) and (h), the Court should grant judgment against the Petitioning Creditors and in favor of Seven Three for costs and attorneys' fees, or against any Petitioning Creditor that filed the petition in bad faith for damages proximately cause by the filing or punitive damages pursuant to § 303(i); and

(iv) whether the Court should abstain and dismiss the involuntary petition pursuant to § 305 of the Bankruptcy Code.

JURISDICTION

This Court has jurisdiction to grant the relief provided for herein pursuant to 28 U.S.C. § 1334. The matter presently before the Court constitutes a core proceeding that this Court may hear and determine on a final basis under 28 U.S.C. § 157(b).

FINDINGS OF FACT

Seven Three is a Louisiana limited liability company organized in April 2015 by Salvador Bivalacqua ("Sal") and Jeff Rogers ("Jeff"), former high school friends and college roommates, to produce, market, and sell New Orleans-themed spirits from a distillery in New Orleans, Louisiana. See Hr'g Tr. 2-248:12-18. No written operating agreement identifying the ownership structure of the company was ever executed. See Hr'g Tr. 1-42:19 to 1-49:7; 2-126:10 to 2:130-6; 2-149:12 to 2-159:5. In 2016 and 2017, to raise capital to fund the building of the company's distillery and the operations of the business, Seven Three issued convertible promissory notes (the "Convertible Notes") to thirteen friends and business associates of Sal and Jeff in exchange for loans to the company in amounts ranging between $25, 000 and $100, 000; those investors included Patrick Dubendorfer, Robert Levis, ^[4] Chad Hunt, ^[5] and M. Theresa Turla.^[6] See Exs. Seven Three G & H Ex. Petitioning Creditors 1 (Turla Exhibit 1); Ex. Petitioning Creditors 6 (Bates 21) (filed under seal); Hr'g Tr. 1-73:13 to 1-74:3. In exchange for each Noteholder's investment in the company, Seven Three agreed to repay the principal amount of the investment with 8% interest per annum (the "Payoff Amount") within 36 months of the issuance date (the "Maturity Date"), unless the principal and interest is converted to an equity investment. See Ex. Seven Three G; Hr'g Tr. 1-173:13-21. Per the terms of each Convertible Note,

[i]n the event that [Seven Three] issues and sells shares of its Equity Securities . . . to investors . . . on or before the Maturity Date, in an equity financing in one or more series of related closings after the date hereof, with total proceeds to [Seven Three] of at least $1, 000, 000 (a "Qualified Financing"), the Payoff Amount shall automatically convert without any further action by the Holder into the Equity Securities sold in the Qualified Financing. . . . If a Qualified Financing occurs after the Maturity Date, the Payor may elect at that time to either convert the Note as described above to the extent of the remaining balance of the Payoff Amount or to have the accrued balance of the Note paid in full out of the proceeds of the Qualified Financing.

Ex Seven Three G, Ex. A ¶ 1. Paragraph 8 of each Convertible Note states that "[u]nless this Note has been...